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Resource Development vs. Rationing

California’s decision to “decouple” the amount of revenue their regulated public energy utilities receive from the amount of energy they deliver is hailed by environmentalists as a breakthrough. But the consequences of this decision to enforce artificial scarcity are not fully appreciated. It might be argued that this policy of “decoupling” the amount of money you collect from the amount of value you produce is a dangerous tampering with the natural laws of supply and demand, and is orchestrated by special interests who benefit while the consumer is victimized. Now the NRDC, in a report released last month entitled “Making Every Drop Work: Increasing Water Efficiency in California’s Commercial, Industrial, and Institutional (CII) Sector,” wants to do the same thing to California’s water supply.

Here are two of the recommendations the NRDC makes that make chills run down my spine:

(1) Prioritize water conservation above increasing supply. The State of California should codify the requirement that efficiency improvements precede supply side resources—as it did in the energy sector—to motivate investment in water efficiency and recycling by agencies who might otherwise be awaiting development of traditional water supplies.

(2) Decouple water agencies’ sales from revenue. Water agencies should not need to rely on water sales to assure their fiscal stability. Water agencies should instead adopt a structure that allows them to recover additional money from customers if sales are significantly below projections. This revenue adjustment mechanism will enable water agencies to aggressively promote efficiency and maximize the conservation price signal for customers.

There is nothing wrong with encouraging conservation. But “maximizing the conservation price signal for customers” is akin to a cell phone company charging you less than 1.0 cents per minute for the first 500 minutes per month per your plan, then charging you 50 cents per minute for every minute you talk over your agreed 500 minutes per month. This unpopular practice amounts to rationing, and bears no relationship to the underlying costs to the provider. The 501st minute cost no more than the 500th, but the consumer paid 50 times as much to use that 501st minute. Now they want to do this with our water.

An alternative that would fulfull goals of water conservation would be to have progressive pricing based on water use, but based on reasonable tiers instead of these cliffs. This alternative to rationing could be calibrated to yield the same results, but wouldn’t punish people who simply place a higher value on using lots of water than others. People with gardens, or who like long showers, or otherwise have a legitimate personal preference for high per capita water use might simply pay 20% more for units of water use that go over their “limit,” and maybe an additional 20% if their usage goes beyond, say, twice their “limit.” Gradually escalating pricing tiers instead of imposing punitive tiers is a more humane way to encourage reductions in water use.

Returning to the NRDC’s other recommendation, prioritizing water conservation over increasing water supply is a recipe for disaster. There are significant ways to increase supplies of water – rebuild and upgrade interbasin aqueducts, build additional collection basins to harvest and store storm runoff, develop aquifer storage to harvest and store storm runoff, build more and better water treatment facilities to recycle waste water and send it back upstream, develop large-scale desalination plants, encourage “smart irrigation” in the agricultural sector which consumes 80% (or more) of California’s water supply, and even, gasp, build a few more dams. Just allowing more farmers to sell their water to urban consumers would easily alleviate water shortages. The idea that a prosperous, technologically advanced region like California faces an inevitable water crisis is ridiculous, and the only way a genuine water crisis may occur is if development of water supplies is not given equal or greater priority to water conservation.

The reason these supply-side alternatives aren’t explored is because they require investment, and these kinds of infrastructure investments are prohibitive in California thanks to the power of trial lawyers who work for environmentalist nonprofits. More than anything else, rippling across the entire supply chain, the inability to cost-effectively develop infrastructure is because environmental lawsuits have tied virtually everything up in knots. And, of course, if these supply-side infrastructure development solutions were implemented, there wouldn’t be a “crisis” anymore.

Other than trial lawyers and environmentalist nonprofits, who benefits from all this? Not the consumer, who pays more for water and energy than water and energy should cost. Not necessarily even the environment, since desalination plants on the Southern California coast could give back millions of acre feet of water each year to the delta. Nor, speaking of the delta, would a peripheral canal, which would be able to inject water into the delta wherever needed, need harm the environment, especially if it were built in conjunction with massive development of desalination capacity on the Southern California coast.

The powerful additional beneficiaries of resource strangulation, artificial scarcity, and environmental alarm are California’s public sector agencies, who can take the artificially inflated prices, “decoupled” from any supposed obligation to develop infrastructure sufficent to actually deliver water and energy to the public at a reasonable price, and use it instead to inflate their salaries and benefits. The collusion between public sector special interests and environmentalist nonprofits is not being explored by journalists nearly as much as it deserves. In general, there is to-date a shameful failure of mainstream journalists, who presumably share a concern for the aspirations of the economically less fortunate, to expose these hidden agendas behind many “green” recommendations.